Report: E&P Company Profits Up, Spending Down
The numbers, it seems, don't tell the entire story. Even though
oil and gas industry upstream revenues, profits and cash flow are
showing record profits for 1999 compared with the previous year's
collapse, exploration and development spending dropped and proved
reserves spending rose significantly, according to Arthur
Andersen's 21st annual Global E&P Trends survey.
E&P companies remain cautions about increasing their capital
spending, and in the long run, this will hurt their stock value,
said Arthur Andersen's Victor A. Burk, managing director of the
energy industry group. He said the slowdown in spending is related
to the "hard lessons learned" during the oil price collapse of
"Many E&P companies find themselves struggling to convince
investors they can create value during a time of strong product
prices and cash flow," Burk said. "If E&P companies cannot
create value in the marketplace with oil prices at $30 per barrel
and natural gas prices at $4 per million BTUs, how will they create
value when prices decline?" he asked.
The survey, released last week in Houston, analyzed 163 public
oil and gas companies worldwide using disclosures of their
activities through 1999 from annual reports submitted to the U.S.
Securities and Exchange Commission and other disclosures by 39
non-U.S. reporting companies.
Arthur Andersen's survey represents an analysis of those with
reserves of more than 5 million BOE, about 86% of the U.S. oil and
natural gas liquids reserves and an estimated 64% of U.S. gas
reserves. Generally, the entire U.S. and international E&P
industry is represented, except for a few national oil companies.
"E&P companies face a major challenge of convincing
investors they can create value," Burk said. They "must find ways
to create and realize value in all their assets," not just the
physical assets. The value of a company's employees, its customers
and supplier relationships all have to be examined and recognized.
"Value can be created and realized in companies' financial assets,
and in their organizational assets such as intangibles, strategy
and vision." Investors today are looking for "value creation"
instead of "value realization," he said.
One company that uses all of its assets well is Enron, Burk
said. Ten years ago, Enron was a "classic old-economics company."
But it remade itself and today has more of the characteristics of a
technology company than a pipeline company. By using not just its
financial assets, but also its organizational assets, such as its
intangible assets like vision, strategy and innovation, the company
was able to grow itself into the diversified powerhouse it is
"A purely E&P company is not like Enron, but they can still
find the value that isn't recognized, whether that's in service, or
equipment supplies, or a relationship with foreign countries," Burk
said. "You first need to understand your assets, and what creates
value in your company, then form a strategy to create value."
Arthur Andersen's survey showed U.S. upstream capital spending
dropped 29% to $25.4 billion in 1999, with decreases in unproved
property acquisition costs (67%), exploration (36%) and development